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DS Smith – soft results as expected, takeover in focus

DS Smith’s full-year results reflect the tricky paper and packaging market, but there are signs of improvement.
DS Smith - potential deal with rival Mondi

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DS Smith’s full-year revenue fell 16% to £6.8bn, ignoring the effect of exchange rates. Weak demand and lower prices impacted performance. Underlying operating profit fell 18% to £701mn, as expected.

Like-for-like volumes fell 2% over the year, but returned to growth in the final quarter, as customers increased promotional activity and stock levels. Positive trends have continued into the new year, including improved pricing. The benefits of this are expected in the second half.

There was a free cash outflow of £175mn, compared to a £354mn inflow the prior year. Net debt rose from £1.6bn to £2.2bn.

A final dividend of 12p per share was announced, taking the total for the year to 18p.

The shares rose 1.0% following the announcement.

Our view

This was always going to be a challenging set of full-year results for packaging giant DS Smith. The paper and packaging market hasn’t been kind. A mix of lower prices and weaker demand as businesses battle tougher conditions has hit the top line hard.

But input costs have been falling and cost savings have absorbed some of the impact, so operating margins weren’t hit as hard as they could have been.

We're cautiously optimistic that volumes will continue to improve. There are early signs that customers, like Amazon, are back in the market after reducing packaging levels last year to cope with lower end-consumer demand. There have also been positive moves in the pricing landscape, though benefits usually lag and aren’t expected to land until the second half.

The group's a key supplier of cardboard boxes to the e-commerce and consumer goods sectors, including 'shelf-ready' options for supermarkets. With a longer lens, demand for these segments is benefitting from structural growth drivers—consumers are keen to shift away from plastic packaging, and reliance on e-commerce is a trend that's here to stay.

Looking at the balance sheet, despite the increase in net debt to 2.1x cash profit, it’s just about at a level we're comfortable with. Last year's lack of cash generation was disappointing, but we're hopeful this was a blip rather than a trend. It's something to keep an eye on, though.

For all the operating chat, deal talks have dominated the news recently, and with Mondi out of the race, DS Smith is looking to press on and merge with the US-based International Paper Company.

Medium-term savings of around £413mn certainly look attractive, significantly higher than what investors had been discussing in the early days of deal speculation. There’s a lot of scope to drive efficiency gains, from integrating plants and sharing technology to using the new combined scale to push for better terms with raw material suppliers. To us, the deal makes a lot of sense.

But as ever, it’s not a done deal until shareholders and regulators give the green light. There’s also speculation that International Paper Company could end up the subject of its own takeover offer, so this story may have further twists to come.

DS Smith is in a good position with exposure to attractive end markets, and we continue to like the business. The valuation will likely be led by developments with the International Paper deal. In these situations, there’s always added risk, with upside in the short term likely to be limited by the implied deal price.

DS Smith key facts

All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.
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Written by
Matt Britzman
Senior Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 20th June 2024